Final answer:
The unit costs of labor will decrease if productivity increases significantly enough to compensate for higher wages, as when a firm invests in more machinery and reduces the hours of labor required.
Step-by-step explanation:
When analyzing the situation where a firm is required to pay higher wages to its workers, we can determine that unit costs of labor will decrease if productivity increases significantly enough to offset the higher wage costs. The rationale behind this is illustrated when a firm, under pressure from union demands, opts for a production method involving more physical capital and less labor, thereby enhancing labor productivity. An example given in the text is a firm manufacturing home exercise cycles which initially pays $16 an hour for labor. When the wage rises to $24 an hour, the firm's response is to adopt a new plan that utilizes three machines and fewer hours of labor. This investment in machinery allows union workers to be more productive, using better equipment than before, which means that even though they are paid more, the unit costs may still decrease due to productivity gains.